| June 27, 1990 | |
| Taxation Programs Branch | Current Amendments and |
| International Audits Division | Regulations Division |
| W.R. McColm | |
| Attention: Dave Burton | 957-2068 |
| F-3603 |
IT Regulation 5907(11) Residency of a Foreign Affiliate
In your memo of March 23, 1990 concerning the above subject you asked whether it is intended policy that a foreign affiliate may be resident of a listed country for purposes of the foreign affiliate rules even though it is not a resident of that country under its tax laws.
In our view the above situation is contrary to tax policy. The policy intent is that a corporation should pay taxes at a rate comparable to that in Canada. The taxes involved may be payable in Canada or, depending on the circumstances, in a listed country. In the circumstances you describe the income of the foreign affiliate will not be subject to tax in Canada, none in the listed country and little or not tax in the unlisted country in which it is resident according to its tax laws and which is probably a tax haven.
In the cases under review it would appear that management and control is in fact exercised by the Canadian owners in Canada and not directors who appear to carry out their roll in a mechanical fashion. You may wish to discuss this aspect with the Legal Services Branch.
B.J. BrysonActing DirectorCurrent Amendments and Regulations Division